Is Las Vegas Sands a Buffett Stock?

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As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Las Vegas Sands (NYS: LVS) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in a recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Las Vegas Sands meet Buffett's standards?

1. Earnings powerBuffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Las Vegas Sands' earnings and free cash flow history:

anImage

Source: S&P Capital IQ.

Las Vegas Sands had a difficult time generating earnings and free cash flow over the past five years, largely because of the economic downturn and some hefty capital expenditures. But profits have been recovering over the past few years.

2. Return on equity and debtReturn on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

Las Vegas Sands100%20%6%
MGM135%50%(9%)
Wynn109%24%15%
Melco Crown82%7%(6%)

Source: S&P Capital IQ.

Historically, Las Vegas Sands has generated decent returns on equity. It employs industry-average leverage.

3. ManagementCEO Sheldon Adelson has been at the job since 1988.

4. BusinessGambling isn't particularly susceptible to technological disruption.

The Foolish conclusionSo is Las Vegas Sands a Buffett stock? Probably not. While it has tenured management and operates in a technologically straightforward industry, it doesn't yet exhibit the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt. However, if you'd like to stay up to speed on Las Vegas Sands' progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

At the time this article was published Ilan Moscovitzowns shares of Melco Crown.You can follow him on Twitter, where he goes by@TMFDada. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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